Delhi High Court
Nandi Infratech Pvt. Ltd. vs R K Bararia & Anr. on 31 May, 2024
Author: Vibhu Bakhru
Bench: Vibhu Bakhru
IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 31.05.2024
+ FAO (COMM) 49/2023 and CMNo.9287/2023
M/S NANDI INFRATECH PVT. LTD. ..... Appellant
versus
M/S R.K. BARARIA & ANR ..... Respondents
Advocates who appeared in this case:
For the Appellant : Mr Sanjoy Ghosh, Senior Advocate with Mr
Rajesh Kumar and Mr Suresh Chand Sharma,
Advocates
For the Respondent : Mr Sanjay Bansal, Advocate
CORAM
HON'BLE MR JUSTICE VIBHU BAKHRU
HON'BLE MSJUSTICE TARA VITASTA GANJU
JUDGMENT
VIBHU BAKHRU, J
1. The appellant (hereafter NIPL) has filed the present appeal under
Section 37(1)(c) of the Arbitration and Conciliation Act, 1996
(hereafter the A&C Act) impugning a judgment dated 19.12.2022
(hereafter the impugned judgment), whereby the learned Commercial
Court rejected NIPL's application being OMP (COMM) No. 85/2021
captioned M/s Nandi Infratech Pvt. Ltd. v. M/s R.K. Bararia & Another.
2. NIPL had filed the aforementioned application [OMP (COMM)
No. 85/2021] under Section 34 of the A&C Act to set aside an arbitral
award dated 07.05.2021 (hereafter the impugned award) delivered by
the Arbitral Tribunal comprising of a sole arbitrator (hereafter the
Arbitral Tribunal).
3. The impugned award was rendered in the context of the disputes
that had arisen between the parties in connection with the Work Order
dated 18.04.2018 (hereafter the VDF Contract) for executing the work
relating to Vacuumed Dewatering Flooring (hereafter VDF) awarded by
NIPL to respondent no. 1 (hereafter RKB).
4. The Arbitral Tribunal has awarded an aggregate sum of
₹1,44,02,313/- along with future simple interest at the rate of 10% per
annum from 08.05.2021 till realization as well as costs quantified at
₹2,50,000/-, in favour of RKB.
FACTUAL CONTEXT
5. NIPL is a company incorporated under the Company Act, 1956
and is, inter alia, engaged in the business of Construction.
6. RKB is engaged in carrying on business as a civil contractor, and
was awarded the contract for executing the work of "Construction of
Proposed Structures for 8 towers, that is tower B, C, D, E, F, G, H and
I, of Amaatra Homes" for a tentative value of ₹36,12,50,000/- by the
Letter of Award dated 01.11.2014 (hereafter LoA). In the year 2016,
NIPL directed RKB to construct two additional towers, that is towers A
and J, increasing the scope of the contract to entail construction of 10
towers of Amaatra Homes.
7. On 18.04.2018, NIPL issued another Work Order (VDF
Contract) for execution of the work of Vacuum Dewatering Flooring
(VDF) of NIPL's residential project 'Amaatra Homes' at Plot No. GH-
02C, Sector 10, Greater Noida West (hereafter VDF work). The
execution of the VDF work was required to be completed within a
period of 60 days to be reckoned from ten days after the date of the VDF
Contract, that is, on or before 27.06.2018. The value of the VDF work
was fixed at ₹1,84,19,500/-.
8. RKB claims that it executed the VDF work up to 16.07.2018 with
its own Ready Mix Concrete (RMC) and raised the bill for the works
done, however, NIPL refused to release the payment and insisted that
the work be executed by RMC supplied by NIPL. In addition to RMC,
NIPL also supplied bricks.
9. The VDF work was not completed within the stipulated period
and by a letter dated 09.12.2018 (hereafter the termination letter), NIPL
terminated the VDF Contract alleging failure on the part of RKB to
perform its obligations.
10. Prior to termination of the VDF Contract, RKB had submitted
two running bills (RA Bill dated 30.06.2018 for a sum of ₹16,15,368/-
and RA Bill dated 02.11.2018 for a sum of ₹68,61,940/-). RKB also
submitted a consolidated bill dated 08.01.2019 for a total amount of
₹1,45,05,142/-.
11. It is RKB's case that NIPL did not pay any amount against the
VDF work executed by it. NIPL disputed the same and claimed that it
had made an ad-hoc payment of ₹6,00,000/- to RKB against executing
the VDF Work.
12. RKB claims that it continued to execute the work till January,
2019 and thereafter NIPL did not permit RKB to enter the site.
13. In the aforesaid circumstances, RKB invoked the arbitration
agreement as contained in the VDF Contract dated 18.04.2018. RKB
also requested NIPL for appointment of an arbitrator, however, it did
not receive any response from NIPL.
14. Thereafter, RKB filed a petition [Arb. Pet. No. 70/2019] under
Section 11 of the A&C Act before this Court for an appointment of
Arbitrator. The aforesaid petition was dismissed with the direction to
place the VDF Contract before the Collector of Stamps. RKB again
filed arbitration petition in December, 2019, before this Court and by
an order dated 06.02.2020, this Court appointed a Sole Arbitrator for
adjudicating the dispute between the parties.
ARBITRAL PROCEEDINGS
15. Before the Arbitral Tribunal, RKB filed his Statement of Claims
raising six claims, which are briefly summarized below:
Claim No.1 for a sum of ₹83,98,080/-:
16. RKB claimed that it had executed the total works for a value of
₹1,43,05,610/-. The same included materials (bricks, RMC and angles)
of an aggregate value of ₹67,74,122/-, which were supplied by NIPL.
Thus, RKB claimed an amount of ₹75,31,488/- on account of the VDF
work done. In addition, it claimed an amount of ₹8,66,592/- as the
component of profit included in the value of the items supplied by NIPL
computed at the rate of 15% of an amount of ₹57,77,280/-. RKB had
founded the said claim on the basis that NIPL had insisted on supplying
the items at a rate higher than as available in the market. Thus, RKB
claimed an aggregate amount of ₹83,98,080/- (₹75,31,488/- plus
₹8,66,592/-). In addition, RKB also claimed GST at the rate of 18% of
the value of work done.
Claim No.2 for a sum of ₹6,00,000/-:
17. RKB claimed that execution of the VDF work had been delayed
for reasons attributable to NIPL and RKB was thus entitled to claim
compensation for the prolongation of work beyond the stipulated date
of completion. RKB claimed a sum of ₹6,00,000/- as compensation for
prolongation of the contract. It quantified the claim at the rate of
₹1,00,000/- per month for a period of six months.
Claim No.3 for a sum of ₹5,40,758/-:
18. RKB claimed loss of profit computed at the rate of 15% of the
value of the balance remaining work quantified at ₹5,40,758/-.
Claim Nos.4 and 5 for interest at the rate of 14% per annum:
19. RKB claimed interest at the rate of 14% per annum for delay in
release of payments (pre-reference and pendent lite). Additionally,
RKB claimed future interest at the rate of 14% per annum on total
amounts as claimed.
Claim No.6 for legal costs
20. RKB claimed legal costs and costs for arbitration.
21. NIPL disputed the aforesaid claims and also raised
counterclaims. NIPL acknowledged that RKB had submitted two
running bills prior to termination of the VDF Contract and had
submitted a consolidated bill dated 08.01.2019 for an amount of
₹1,45,05,142/-. NIPL claimed that the said bills were exaggerated and
that the value of works completed by RKB was only ₹64,01,191/- till
the termination of the contract. It claimed that against the aforesaid
amount it had paid an ad-hoc amount of ₹6,00,000/- and had also issued
debit notes for the materials supplied aggregating ₹58,99,539.10. The
said amounts were required to be adjusted against the value of work
done. Thus, according to NIPL, a sum of ₹1,26,405/- was recoverable
from RKB.
22. In addition, NIPL also claimed a sum of ₹9,13,475/- towards
liquidated damages for delay in execution of the works.
23. On the basis of the rival pleadings, the Arbitral Tribunal framed
the following issues:
"(I) To what amount the claimant is entitled against
claim no. 1 of Rs.83,98,080/- and GST on
Rs.1,43,05,610/- amounting to Rs.25,75,010/-?
OPC
(II) Whether the claimant is entitled to damages on
account of prolongation of the work against claim
no. 2 of Rs.6,00,000/-? If so, how much? OPC
(III) Whether the Claimant is entitled to loss of profit
due to alleged breach of contract committed by
the Respondent on the balance of work not got
executed from the Claimant against Claim no. 3
of Rs. 5,40, 758/-? OPC
(IV) Whether the Claimant is entitled to interest? If so,
at what rate, on what amount and for what period?
OPC
(V) Whether the Claimant is entitled the cost of
arbitration and litigation? If so, how much against
Claim no. 6? OPC
(VI) Whether the termination of work of contract was
valid and legal? OPR
(VII) Whether the Respondent had made payment of
Rs.6,00,00/- to the claimant? OPR
(VIII) Whether the Respondent is entitled to a sum of
Rs.58,99,539/- against debit notes for supply of
materials and on other counts? If so, how much?
OPR
(IX) Whether the Respondent is entitled to liquidated
damages for alleged breach of contract on the part
of the Claimant? If so, how much against claim of
Rs.9,13,475/-? OPR
(X) Whether the Respondent is entitled to the counter
claim of Rs.1,26,405/- being the alleged excess
payment? OPR
(XI) Whether the Respondent is entitled to interest? If
so, at what rate, on what amount and how much?
OPR
(XII) To what relief the parties are entitled? Onus on
parties"
24. Both the parties submitted their documents relied upon by them.
RKB also tendered the affidavit by way of evidence of his son (Sumit
Bararia - CW1), who was stated to be entrusted with the execution of
the VDF work. He was also cross-examined by the counsel for NIPL.
NIPL also tendered evidence by way of affidavits of Mr. Shibalak Rai
(RW1), claimed to be a sub-contractor; Mr. Satindra Singh (RW2); Mr.
Kunal (RW3); and, Mr. Umesh Gupta (RW4) who was the construction
and financial advisor of the NIPL, for the project.
IMPUGNED AWARD
25. The Arbitral Tribunal considered the various items covered in the
Final Bill and accepted RKB's claim in regard to works executed. RKB
had claimed that it had executed the works amounting to ₹1,34,97,625/-
as per measurements and had also made a claim of ₹8,07,985/- towards
extra items of work. According to RKB, it had executed the works
aggregating to ₹1,43,05,610/-. Whilst, the Arbitral Tribunal accepted
the said amount, it found that RKB had computed its claim for the
quality of PCC at a higher rate of ₹3,879/- instead of ₹3,800/-. Thus,
the aggregate excess amount of ₹80,442/- charged on account of PCC
was disallowed.
26. The Arbitral Tribunal held that RKB had executed work of an
aggregate value of ₹1,42,25,168/-. The Arbitral Tribunal also accepted
that RKB would be entitled to GST on the aforesaid amount calculated
at 18% of the value of work executed, which was quantified at
₹25,60,530/-. However, the Arbitral Tribunal rejected RKB's claim for
a sum of ₹8,66,592/-being the element of profit on the extra items as
supplied by NIPL.
27. The Arbitral Tribunal accepted that the value of items supplied
by NIPL was ₹67,74,122/- (bricks of a value of ₹3,47,857/-; RMC of a
value of ₹62,89,167/-; and angles of a value of ₹1,37,098/-). After
adjusting the aforesaid amount, the Arbitral Tribunal found that a sum
of ₹1,00,11,576/- (₹1,42,25,168/- less ₹67,74,122/- plus ₹25,60,530/-)
was due and payable to RKB and had accordingly awarded the said
amount against claim no.1.
28. The Arbitral Tribunal rejected NIPL's claim that it had made an
ad-hoc payment of ₹6,00,000/- to RKB as payment of the said amount
was not established.
29. In addition, the Arbitral Tribunal accepted RKB's claim for loss
of profit for the remaining works quantified at ₹5,40,758/-. The Arbitral
Tribunal held that RKB was entitled to loss of profit at the rate of 15%
of the balance works of ₹41,94,332/- (total value of the work
₹1,84,19,500/- less the works executed by RKB valued at
₹1,42,25,168/-). The Arbitral Tribunal reasoned that in terms of Clause
12 of the VDF Contract an allowance of 15% was required to be
factored in for ascertaining the rates of extra items and therefore the said
compensation for loss of profit at the said rate was reasonable. Since,
RKB's claim was for a lower amount, the same was allowed.
30. In addition, the Arbitral Tribunal awarded interest at the rate of
14% per annum on the amount withheld for the period 08.02.2019 till
the date of the award (07.05.2021) quantified at ₹34,49,979/-. The
Arbitral Tribunal also awarded a sum of ₹4,00,000/- towards
compensation for prolongation of the works.
31. Insofar as counter claims are concerned, the Arbitral Tribunal
rejected the same. It did not accept NIPL's calculation of the work done
as it was not based on joint measurements. The Arbitral Tribunal also
found that RKB had submitted measurement sheets along with its bills,
which was not disputed at the material time. The Arbitral Tribunal
faulted NIPL for the delay in execution of the works. It held that NIPL
had breached the terms of the contract by withholding payments and
delaying the execution of VDF work. A tabular statement setting out
the amounts awarded in favour of the RKB is set out below:
CLAIM AWARDED
Claim No. 1: Rs. 83,98,080/-
Claim No. 2: Rs. 4,00,000/-
Prolongation of work
Claim No. 3: Rs. 5,40,758/-
Loss of Profit at the rate of 15%
of balance work
Claim No. 4 & 5: Rs. 34,49,979/-
Interest at the rate of 14%
Claim No. 6: Rs. 2,50,000/-
Legal Cost
SUBMISSIONS
32. Mr. Sanjoy Ghosh, the learned counsel appearing for NIPL
assailed the impugned award on several grounds. First, he submitted
that the Arbitral Tribunal had grossly erred in accepting RKB's claim
that it had executed the works at a value of ₹1,42,25,168/-. He
contended that the Arbitral Tribunal had grossly erred in accepting that
the said claim was based on measurement of the work. He submitted
that in terms of the contract between the parties payments were to be
released on the basis of the joint measurements. However, RKB had
not cooperated with NIPL to jointly measure the work despite several
requests. He submitted that Arbitral Tribunal had erred in not
appreciating that NIPL had sent various e-mails to RKB to conduct joint
inspections but RKB had not complied with the same. In the
circumstances, NIPL had unilaterally measured the work done. It had
also produced measurement sheets that were forwarded to RKB. He
contended that NIPL had verified the quantum of work done and
responded to RKB's e-mail on 18.04.2019 confirming that the quantum
of work done was valued at ₹64,01,191/- and the same was not disputed
by RKB at the material time. He submitted that the said measurement
sheets required to be considered as the only basis for adjudicating any
claim regarding the work done by RKB. He contended that Arbitral
Tribunal had erred in simply relying on the measurement sheets as
produced by RKB and there was no basis for accepting the measurement
sheets submitted by RKB except its self-serving assertions, and
rejecting the measurement sheets as furnished by NIPL. He submitted
that the approach of the Arbitral Tribunal was in conflict with the most
basic notion of morality and justice.
33. He submitted that the award of sum of ₹25,60,530/- as GST is
patently illegal as the same includes value of items on which GST is
included. He submitted that admittedly items worth ₹67,74,122/- were
supplied, which included an element of GST. Thus, the GST on the
said amount was required to be reduced. However, in all fairness to Mr.
Ghosh, he did not seriously canvass this challenge.
34. Mr Ghosh submitted that the award of compensation of
₹4,00,000/- for prolongation of the work was not sustainable. He
submitted that the same was contrary to clause 14 of the VDF Contract,
which expressly prohibited payment of any compensation for delay in
execution of the works. He further submitted that computation of the
said amount was without any basis or material. The Arbitral Tribunal
had quantified the compensation on the assumption that RKB's son
would be entitled to ₹1,00,000/- per month for the time spent by him in
overseeing the execution of VDF work. This basis is arbitrary and
unfounded.
35. He submitted that the award of loss of profits as claimed was
based on no evidence as RKB had led no evidence in support of its claim
for loss of profits. The Arbitral Tribunal had relied on clause 12 of the
VDF Contract, which deals with extra items and provides for an
allowance of 15% on account of overheads, profits as well as
establishment charges. He contended that award of loss of profits at the
rate of 15% was not supported by the said clause as well.
36. Lastly, he submitted that the award of interest was unsustainable
as it was not based on any evidence.
37. Mr. Ghosh also relied on the various decisions including the
decision of the Supreme Court in PSA SICAL Terminals (P) Ltd. v.
Board of Trustees of V.O. Chidambranar Port Trust Tuticorin: 2021
SCC OnLine SC 508; Associated Engineering Co. v. Government of
Andhra Pradesh & Anr.: (1991) 4 SCC 93; and Hindustan Zinc Ltd.
v. Friends Coal Carbonisation: (2006) 4 SCC 445 and the decisions of
this Court in Indo Nabin Projects Ltd. v. Powergrid Corporation of
India Ltd.: 2018 SCC OnLine Del 8405; National Highways Authority
of India v. IRB Pathankot Amritsar Toll Road Ltd.: Neutral Citation
2023:DHC:4352-DB; Chintels India Ltd. v. Bhayana Builders Pvt.
Ltd.: 2022 SCC OnLine Del 1964; and GTM Builders & Promoters
Pvt. Ltd. v. Sneh Developers Pvt. Ltd.: 2018 SCC OnLine Del 9653 as
well as the decision of the Bombay High Court in Edifice Developers
and Projects Engineers Ltd. v. Essar Projects (India) Ltd.: 2013 SCC
OnLine Bom 5.
REASONS & CONCLUSION
Quantum of work done
38. First and foremost question to be examined is whether any
interference is warranted in the decision of the Arbitral Tribunal to
accept RKB's claim for the quantum of work done. A plain reading of
the impugned award indicates that the Arbitral Tribunal's decision to
accept RKB's claim as to the quantum of work done is supported by
material on record. The Arbitral Tribunal found that RKB had
continued to work till 23.01.2019, which was beyond the date of
termination of VDF Contract. The Arbitral Tribunal found that RKB
had submitted its measurement sheets along with three bills (Bills dated
30.06.2018, 02.11.2018 and 08.01.2019). NIPL had disputed that RKB
had submitted the measurement sheets along with the three bills.
However, the Arbitral Tribunal found that this denial was false. The
bills were sent through e-mails and on RW3 (Mr. Kunal - Engineer-in-
Charge of NIPL) being confronted with the said e-mails, he admitted
that the measurement sheets were received along with the three e-mails
(E-mails dated 03.07.2018, 03.11.2018 and 27.01.2019) whereby the
bills dated 30.06.2018, 02.11.2018 and 08.01.2019 were communicated
to NIPL. Further RKB's witness (CW1) had also tendered his evidence
as to the quantum of work done. He was also cross-examined but there
is nothing in his testimony to discredit it. He was specifically asked
whether the measurement sheets had been submitted along with the bills
(Q.59) to which he answered in the affirmative. He was specifically
asked as to how the quantities were measured without joint verification
and who had verified the same. He responded by stating that the
quantities were measured from the drawings and co-related with the
work done at site and he had himself done it. NIPL had also produced
measurement sheets, which the Arbitral Tribunal did not accept. The
Arbitral Tribunal found that the persons who had physically prepared
the measurement sheets had not been examined. The Arbitral Tribunal
also did not accept NIPL's claim that despite being called upon to
jointly measure the work done, it had failed to join the said exercise.
The Arbitral Tribunal found that there was no material on record to
establish that NIPL had called upon RKB to jointly measure the work
done.
39. There is a serious dispute as to the quantum of work done and
both parties had led evidence in this regard. However, the Arbitral
Tribunal had not accepted NIPL's claim.
40. NIPL, essentially, seeks that this Court to once again re-evaluate
the evidence and re-adjudicate the said question. This is clearly outside
the scope of proceedings under Section 34 of the A&C Act. It is settled
law that this Court does not re-adjudicate or re-evaluate the disputes in
considering an application to set aside the arbitral award under Section
34 of the A&C Act. The scope of examination is limited to whether the
arbitral award is liable to be set aside on any of the grounds set out under
Section 34(2) or under Section 34(2A) of the A&C Act. It is well settled
that the Arbitral Tribunal is the final arbiter to evaluate sufficiency and
merits of the evidence. This Court cannot re-evaluate the evidence and
material produced by the parties and supplant its opinion in place of that
of the Arbitral Tribunal.
41. Although, there is a substantial contest as to the quantum of work
executed, it is clear that this is not a case where the Arbitral Tribunal's
decision is based on no evidence at all. On the contrary, it is clear from
a plain reading of the impugned award that the Arbitral Tribunal had
evaluated and appreciated the evidence led by the parties. Its decision
is based on material available on record. Further, we do not find the
Arbitral Tribunal's view is not a plausible one. It is established on
record that RKB had sent its bills along with measurement sheets. The
same were not disputed at the material time. Although, NIPL had
disputed receipt of the said measurement sheets, the evidence on record
clearly established that the same were received by NIPL. The VDF
Contract required that payments be made on the basis of joint
measurements, however, it is RKB's case that it was not allowed to
enter the site after January, 2018 and at the material time there was no
dispute as to the quantum of work done.
42. In view of the above, we reject NIPL's contention that the
impugned award, to the extent it accepts RKB's claim as to the quantum
of work done, is required to be set aside as vitiated by patent illegality
or on the ground that it is in conflict with the public policy of India. The
scope of interference under the said grounds is now well settled and it
does not entail re-appreciation and re-appraisal of evidence on merits of
the dispute. We are unable to accept that the decision of the Arbitral
Tribunal offends the basic notions of morality and justice as contended
by Mr. Ghosh, learned counsel appearing for NIPL.
Award of GST
43. The next question to be examined is whether the Arbitral
Tribunal has erred in awarding 18% GST on the quantum of work done.
It is NIPL's case that the award of an amount of GST is contrary to
Section 16 of the Central Goods & Services Tax Act, 2017 (hereafter
CGST Act). It is also contended that since the quantum of work done
included value of items (bricks valued at ₹3,47,857/-; RMC valued at
₹62,89,167/- and angles valued at ₹1,37,098/-) aggregating to
₹67,74,122/- which included GST, the same was required to be
deducted from the value of GST on the quantum of work done. We find
the said contention unmerited. GST is payable on the output goods and
services. Thus, RKB's claim that it would be liable to pay GST at the
rate of 18% on the total value of work executed, which the Arbitral
Tribunal has quantified at ₹1,42,25,168/-, is correct. Mr. Ghosh was
unable to point out any provision in the CGST Act, which restricts the
liability to pay GST on output supplies, on the basis of tax paid supplies
used for providing taxable goods or services. Undisputedly, a taxable
entity would be entitled to claim Input Tax Credit in respect of the GST
paid on input supplies. However, that does not absolve NIPL of its
liability to pay GST on the supplies received by it. Admittedly, if RKB
is obliged to provide NIPL credit for the value of taxable inputs supplied
by NIPL, it is also entitled to claim Input Tax Credit for the same. This
does not mitigate NIPL's liability to pay GST for the value of work
executed by RKB.
Compensation for prolongation of work
44. The next question to be examined is whether the Arbitral
Tribunal has erred in allowing compensation for damages at the rate of
₹1,00,000/- per month for a period of four months on account of
prolongation of works.
45. The Arbitral Tribunal found after evaluating the evidence placed
on record, including an e-mail dated 10.09.2018 sent by RKB to NIPL,
that RKB had established that the execution of works was prolonged for
at least four months due to unreasonable demands and lapses on the part
of NIPL. Concededly, the said findings cannot be interfered with in this
proceeding.
46. NIPL's challenge to the award of compensation is, essentially, on
two fronts. First, that it is contrary to Clause 14 of the VDF Contract,
which expressly prohibits claim of any such compensation. And second,
that the quantification for such compensation is without any evidence
at all.
47. At this stage it is relevant to refer to Clause 14 of the VDF
Contract, which is set out below:
"14. Delay in Commencement:
The contractor shall not be entitled to any
compensation (monetary only) for any loss suffered
by him on account of delays in commencing or
executing the work, whatever the case delays may
be, including delays arising out of modification to
the work entrusted to him or in any sub-contract
connected there with or delay in awarding contract
for other trades of the project or in commencement
of such works or in procuring Government
controlled or other building materials or any other
reason whatsoever and the client shall not be liable
for any claim in respect thereof (time duration will
be extended accordingly)."
48. It is clear that the contract in question expressly provides that
RKB would not be entitled for any compensation for loss suffered on
account of delay in "commencing or executing the work". The parties
are bound by the terms of their contract. The Arbitral Tribunal had held
that the said clause would not be applicable in respect of the delays
caused by NIPL. The said conclusion clearly runs contrary to the plain
language of Clause 14 of the VDF Contract, which expressly provides
that no compensation shall be payable on account of delay including for
"any other reason whatsoever". Section 28(3) of the A&C Act
expressly requires the Arbitral Tribunal to take into account the terms
of the contract. In Union of India v. Manraj Enterprises: (2022) 2
SCC 331, the Supreme Court had held that a clause of the contract
prohibiting grant of interest would be binding and an award in disregard
of the said clause would be liable to be set aside. A similar view was
also expressed by the Supreme Court in other prior decisions as well
[see: Union of India v. Ambica Construction: (2016) 6 SCC 36; Sree
Kamatchi Amman Constructions v. Divisional Railway Manager
(Works), Palghat & Ors.: 2010 SCC OnLine SC 919; Jaiprakash
Associates Ltd. (JAL) v. Tehri Hydro Development Corporation
(India) Ltd. (THDC): (2019) 17 SCC 786.
49. In Oil and Natural Gas Corporation v. Wig Brothers Builders
and Engineers Pvt. Ltd.: (2010) 13 SCC 377, the Supreme Court held
that the Arbitral Tribunal had exceeded in his jurisdiction in awarding
compensation for delay in execution of the works, which was prohibited
by the contract. The relevant extract of the said decision is set out
below:
"5. ...... But clause 5A of the contract pertains to extension of
time for completion of work and specifically bars any claim for
damages. The said clause is extracted below :
"In the event of delay by the Engineer-in-Charge to hand over to
the contractor possession of land/lands necessary for the
execution of the work or to give the necessary notice to the
contractor to commence work or to provide the necessary
drawing or instructions or to do any act or thing which has the
effect of delaying the execution of the work, then
notwithstanding anything contained in the contract or alter the
character thereof or entitle the contractor to any damages or
compensation thereof but in all such cases the Engineer-in-
Charge may grant such extension or extensions of the completion
date as may be deemed fair and reasonable by the Engineer-in
Charge and such decision shall be final and binding."
6. In view of the above, in the event of the work being delayed
for whatsoever reason, that is even delay which is attributable to
ONGC, the contractor will only be entitled to extension of time
for completion of work but will not be entitled to any
compensation or damages. The arbitrator exceeded his
jurisdiction in ignoring the said express bar contained in the
contract and in awarding the compensation of Rs.9.5 lakhs. This
aspect is covered by several decisions of this Court. We may refer
to some of them.
* * * *
In Ramnath International Construction (P) Ltd. v. Union of India
- 2007 (2) SCC 453, a similar issue was considered. This Court
held that clause 11(C) of the General Conditions of Contract
(similar to clause 5A under consideration in this case) was a clear
bar to any claim for compensation for delays, in respect of which
extensions had been sought and obtained. This Court further held
that such a clause amounts to a specific consent by the contractor
to accept extension of time alone in satisfaction of claims for
delay and not to claim any compensation; and that in view of such
a bar contained in the contract in regard to award of damages on
account of delay, if an arbitrator awards compensation, he would
be exceeding his jurisdiction."
50. In the aforesaid view, the decision of the Arbitral Tribunal to
award compensation contrary to the terms of the VDF Contract vitiates
the impugned award to the said extent by patent illegality.
51. We also find merit in the contention that the quantification of the
amount of compensation is also not founded on any evidence. The
Arbitral Tribunal has awarded a sum of ₹1,00,000/- solely on the basis
that RKB's son had devoted his time for the works executed at the site
and he was a qualified engineer. There is no material on record to
establish the additional expenditure incurred by RKB during the period
of prolongation of the contract. The impugned award is thus based on
no evidence at all.
Compensation for loss of profit
52. The next question to be examined is whether the impugned award
to the extent it awards compensation for the loss of profit is sustainable.
The Arbitral Tribunal had awarded an amount of ₹5,40,758 as
compensation for loss of profit on the unexecuted works. The Arbitral
Tribunal had found that NIPL had wrongfully terminated the VDF
Contract and thus RKB would be entitled to claim loss of profit on the
unexecuted works. We find no ground to interfere with this finding.
However, the award of compensation is not based on any evidence or
materials. It is settled law that a party claiming damages on account of
breach of contract is required to establish the same. In the present case,
RKB had led no evidence to establish the losses that it had suffered on
account of non-execution of the balance works. There is no material
whatsoever on record, which would establish that RKB would have
earned 15% profit on the value of the VDF Contract. The quantum of
loss is quantified solely on the basis that Clause 12 of the VDF Contract,
which provides that rates of extra items would include "an all inclusive
allowance of 15%". Clause 12 of the VDF Contract is relevant and is
set out below:
"12. Extra Items:
If the contractor is required to any such item/work in
the course of construction for which the schedule of
rate has not been quoted by him, he must undertake
such work and he should bring to the notice of the
Engineer in charge within seven days of the
occurrence. The rate for such additional work shall be
determined by the Engineer in Charge as per the
following:
• The rate to be derived from one of the quoted rates for
similar item of work in the tender.
• Rates based on actual observation and/or analysis of
labour, materials, testing and commissioning
involved in such work. For this purpose the contractor
shall submit to Engineer ln charge detailed analysis
of the rate proposed by the Contractor supported by
relevant vouchers along with the estimated quantity
of work item involved. While fixing of rates for extra
items an all-inclusive allowance of 15% of the cost
will be provided for contractor over heads, profit and
establishment charges."
53. The fact that rates of extra items would include an all inclusive
allowance of 15% of costs on account of "overheads, profits and
establishment charges" does not establish that RKB would have earned
15% profit on execution of the contract in question.
54. The mark up on account of overheads, profit and establishment
expenses in item rates cannot form the basis of awarding compensation
for loss of profits that would have been earned by execution of the
contract. This is essentially for three reasons. First, that analysis of
rates of an extra item is not akin to execution of the contract of the works
as a whole. The value of the contract is determined on the basis of the
offer made by the contractor and there is no requirement for the
contractor to align its estimated profit on the basis of analysis of rates
of extra items. It is quite possible that a contractor, who has unutilized
spare capacity, may agree to execute the works on marginal profits. On
the other hand, a contractor that has no spare capacity may not accept a
contract unless there is sufficient mark up to expand its capacity. The
profit margin on which a contractor would agree to execute the works
has no relation with the rate analysis for extra items.
55. Second, an inclusive allowance of 15% on the item of rates
translates to an allowance of 13.04% on the value of item rate. This can
be clearly illustrated by assuming the costs of a component of extra item
at ₹100/-, a 15% inclusive allowance would translate to an item rate of
₹115/-. A profit mark up of ₹15/- on the item rate of ₹115/- would
translate into 13.04% (₹15/115). Thus, if it is assumed that the balance
work was akin to an extra item, the same would include an allowance
of 13.04% on the value of the work as mark up on account of overheads,
profits and establishment expenses. Thus, the assumption that the loss
of profits is 15% of the remaining value of the work is ex facie
erroneous.
56. Third, all inclusive allowance of 15% includes an allowance for
overheads and establishment expenses in addition to an allowance for
profits. RKB's claim was confined to loss of profits alone. Thus, in
any event, it would not be apposite to assume a profit margin of 15%
on the basis of analysis of rates for extra items. The said analysis would
inapposite as the all inclusive allowance of 15% of costs also includes
establishment expenses and overheads.
57. In Edifice Developers and Projects Engineers Ltd. v. Essar
Projects (India) Ltd. (supra), a Division Bench of the Bombay High
Court had upheld the decision of the learned Single Judge faulting the
Arbitral Tribunal in awarding the claims for overhead losses without
any evidence. In the said case, the Arbitral Tribunal, following the
decision in the case of AT Brij Paul Singh v State of Gujarat: AIR
1984 SC 1703 had allowed the claims for overhead losses. In the said
context, the Division Bench held as under:
"10. Brij Paul Singh's case therefore does not stipulate as a
doctrine of law that the formula which has been prescribed in
Hudson's treatise must invariably be accepted in all cases as
a measure of damages sustained on account of loss of
overheads. On the other hand in the subsequent decision of
the Supreme Court in McDermott International (supra), the
Supreme Court has relied upon the following observations
contained in the earlier decision in M.N.
Gangappa v. Atmakur Nagabhushanam Setty & Co. (1973)
3 SCC 406.
"In the assessment of damages, the court must consider
only strict legal obligations, and not the expectations,
however reasonable, of one contractor that the other
will do something that he has assumed no legal
obligation to do."
11. The judgment in McDermott International (supra)
considers various formulae including Hudson's Formula,
Emden Formula and Eichleay Formula. As regards Hudson's
Formula the Supreme Court has noted, in the following
extract, that although it has received judicial support in many
cases, it has been the subject matter of criticism:
"(a) Hudson Formula : In Hudson's Building and
Engineering Contracts, Hudson formula is stated in the
following terms:
"Contract head office overhead & contract sum period
of delay" profit percentage x --------------------- x
contract period
In the Hudson formula, the head office overhead percentage
is taken from the contract. Although the Hudson formula has
received judicial support in many cases, it has been criticized
principally because it adopts the head office overhead
percentage from the contract as the factor for calculating the
costs, and this may bear little or no relation to the actual head
office costs of the contractor."
(emphasis supplied)
12. In McDermott International (supra) the Supreme
Court has held that it is an accepted position that different
formulae can be applied in different circumstances and the
question as to whether damages should be computed by
taking recourse to one or other formula, having regard to the
facts and circumstances of a particular case, would fall within
the domain of the Arbitrator. In the present case no other
formula other than Hudson's formula has been considered in
the arbitral award. In the present case the Arbitrator
proceeded on the basis that it was only Hudson's Formula
which was to be applied and that even though no direct
evidence had been adduced on behalf of the Appellant,
nonetheless the Appellant would be entitled to damages
measured with reference to the aforesaid formula. This
approach of the Arbitrator is manifestly in the teeth of the law
laid down by the Supreme Court in McDermott International.
Section 28(1)(a) requires that the Arbitral Tribunal shall
decide a dispute submitted to arbitration in accordance with
the substantive law for the time being in force in India.
Section 28(3) requires the Arbitral Tribunal to decide in
accordance with the terms of the contract and take into
account the usages of the trade applicable to the transaction.
The Arbitral Tribunal under Section 28(2) can act as amiable
compositeur and can decide ex aequo et bono only if parties
have expressly authorized it to do so. In the present case, the
Learned Single Judge was correct in coming to the conclusion
that the award of the Arbitrator proceeds on the manifestly
misconceived notion that a contractor is entitled to claim
overhead losses even in the absence of evidence on the basis
of Hudson's Formula. Similarly, the Arbitral Tribunal
proceeded on a misconceived premise that this formula is
invariably adopted for quantification of claims for overhead
losses in India. In the present case the Appellant produced no
evidence in support of its claim; this has been so stated in the
Award. The award of the claim is on the misconceived basis
that the Hudson's Formula must be applied despite the
absence of evidence. Since the fundamental basis that has
permeated the award is contrary to law, the judgment of the
Single Judge cannot be faulted in setting aside the arbitral
award on that aspect."
58. We respectfully concur with the aforesaid view. Thus, the
impugned award, to the extent it awards compensation at the rate of
15% of the value of unexecuted works without any evidence or material,
is vitiated by patent illegality.
59. NIPL has also challenged the award of interest as being patently
illegal, however, we find no merit in the said contention. The award of
14% interest cannot by any stretch be considered as unreasonable. We
are also of the view that the Arbitral Tribunal's decision to award future
interest at the rate of 10% per annum requires no interference in this
proceeding. Since, RKB has succeeded substantially, we find no
ground to interfere with award of costs as well.
60. In view of the above, the appeal is partially allowed and the
impugned award to the extent the Arbitral Tribunal has allowed Claims
no.2 and 3 - award of compensation for prolongation of works and on
account of loss of profits - is set aside.
61. The pending application, if any, is also disposed of.
VIBHU BAKHRU, J
TARA VITASTA GANJU, J
MAY 31, 2024
'gsr'
